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Sympathy for the Trustafarians

June 24, 2014 12:32 pmJune 24, 2014 12:32 pm

A number of people have asked me to comment on Greg Mankiw’s defense of inherited wealth. It’s a strange piece,
oddly disconnected from the real concerns about patrimonial capitalism. But let me focus on two key problems with Mankiw’s analysis – one purely economic, one involving political economy.

So, on the economics: Mankiw argues that accumulation of dynastic wealth is good for everyone, because it increases the capital stock and therefore trickles down to workers in the form of higher wages. Is this a good
argument?

Well, if there’s one thing I thought economists were trained to do, it was to be clear about opportunity cost. We should compare accumulation of dynastic wealth with some alternative use of resources –
not assume, as Mankiw in effect does, that if not passed on to heirs that wealth would simply disappear. Maybe he’s assuming that the alternative would be riotous living by the current rich, but that’s
not a policy alternative.

In fact, what we’re really talking about here is taxation of wealth., and the question is what would happen to that revenue versus what happens if the rich get to keep the money. If the government uses the extra
revenue to reduce deficits, then all of it is saved – as opposed to only part of it if it’s passed on to heirs. If the government uses the revenue to pay for social insurance and/or public goods, that’s
likely to provide a lot more benefit to workers than the trickle-down from increased capital.

The point is that you can only justify Mankiw’s claim that inherited wealth is necessarily good for workers by insisting that the government would do nothing useful with the revenue from inheritance taxes. I’d
call that assuming your conclusions; in any case, it’s a claim that deserves to be made openly, not smuggled in on the pretense that you’re just doing economic analysis.

But the larger criticism of Mankiw’s piece is that it ignores the main reason we’re concerned about the concentration of wealth in family dynasties – the belief that it warps our political economy,
that it undermines democracy. You don’t have to be a radical to share this concern; not only did people like Teddy Roosevelt openly talk about this problem, so (as Thomas Piketty points out) did Irving Fisher
in his 1919 presidential address to the American Economic Association.

What’s curious is that conservative economists are well aware of the danger of “regulatory capture”, in which public institutions are hijacked by vested interests, yet blithely dismiss (or refuse
even to mention) the essentially equivalent problem of democratic institutions hijacked by concentrated wealth. I take regulatory capture quite seriously; but I take plutocratic capture equally seriously. And this
is not an issue you can deal with by claiming that the benefits of capital accumulation trickle down to workers.

If Mankiw wants to argue that the costs of any attempt to limit wealth concentration would exceed the benefits, fine. But “more capital is good” is not a helpful contribution to the discussion.